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I have decided to pay more attention to my backups. I have Mac mini with 500 GB.
What I normally do:
- data that I need across several computers is stored on Dropbox
- older stuff is stored on an aging external hard disk
- all my email accounts are imap
- data that I won't be using in a while is stored on DVD and cloud storage
- for everything that I want version management I use an online svn account

If I would buy an external hard drive and use it for Time machine. How much bigger does it have to be than the internal hard drive? I have read that with Time machine you can go back to previous versions of a document, which means more data. Does Time machine use the entire external hard drive? Because I would like to use the external drive to backup and share data between my mac mini and linux box. What are the advantages of time machine when you don't care about previous versions?

I use and recommend a drive that is twice the size of the internal drive for time machine backups. I dedicate that drive only to time machine, nothing else.

1. MacBook Pro, 500gb drive, 1TB Time Machine drive hooked up to Airport Extreme. I have used time Machine to get me out of a few jams so far... I love it.
2. MacMini, 500gb drive, 1TB Time Machine drive hooked up via USB to MacMini. Haven't needed it yet, but nice to know it is there.
3. 4TB WD LifeBook hooked up to the AirPort Extreme via Ethernet for network storage (2.4 TB full and growing). This drive has different shares set up for different file types and uses; photos, video, documents and installs.
4. 4TB WD external drive hooked up to MacMini for iTunes only (2.1 TB full and growing).

So far, after 1 year of the MBP using the Time Machine drive on the Airport Extreme, it is full, and now overwriting the oldest backup set. This is how it is intended to function. The TM drive for the MacMini is not even at 100GB yet, there is hardly anything stored on the Mini to back up yet (40gb/500gb full).

I also use DropBox for my current working documents and such.

This is how I use my stuff. Watch for sales on drives to get them relatively cheap.
I got the 2 1 TB drives for Time Machine for about $100 each.
I got the 2 4 TB drives for storage and iTunes for $225 each.

I really recommend having a TM drive and a separate storage drive. That way, you don't have all your eggs in one basket.